ECONOMY

Djibouti

Djibouti may be one of the tiniest, youngest and least-known nations in Africa, but it could also well be the most talented in business growth and investments. While its larger, more powerful neighbors are embroiled in a never-ending border dispute, Djibouti stands out as a haven of stability and neutrality.

Regional Importance

Neighboring Ethiopia, with a population of over 90 million, is the second most populous country in Africa. With over 80% of the Port of Djibouti’s activity either imports to or exports from Ethiopia, Djibouti relies heavily on its larger neighbor’s goods and service needs. Djibouti became Ethiopia’s most important foreign trade outlet. Djibouti also acts as an important container transshipment hub for other East African countries, which send their goods to Djibouti by road, rail and air before having them transferred onto shipping for export to the wider world.

In February 2012, Djibouti signed a historic tripartite cooperation agreement with Ethiopia and the South Sudan. The aim is to improve infrastructure between the three countries, with telecommunications, roads, railways and oil transport the first points of focus. As the only nation of the three with a coastline, Djibouti will provide invaluable maritime access for the arrangement. Djibouti is strategically situated between the western edge of the Gulf of Aden and the entrance to the Red Sea.

As a significant regional port, Djibouti's modern economy revolves around the shipping and refueling industries. Djibouti is a country in need for foreign investment for its economic development. The country’s assets include a strategic geographic location, a Free Zone, an open trade regime, a stable currency, substantial tax breaks, and other incentives.

Djibouti's economy is service-based, with the country's seaport and a railroad linking it to Addis Ababa accounting for the bulk of economic activity. Djibouti has a coastline of 314 kilometers and the Red Sea known to be very rich in fish.

Djibouti has experienced a period of sustained growth and relative prosperity over the past decade. Driven by foreign direct investment (FDI) approaching US$250mn a year, real GDP growth averaged 4.4% per annum between 2004 and 2011 in this small Red Sea state of approximately 900,000 people. This compares to average growth of just 0.2% during the decade from 1994 to 2003.

Continuing the acceleration begun in 2012, the rate of growth rose from 4.5% to 5.5%. Its two traditional pillars remained foreign direct investment (FDI) and port activity. FDI was a record USD 277 million, topping the figures between 2006 and 2008 during construction of the Doraleh container port, and accounted for 18.6% of gross domestic product (GDP).

Table 1 - Macroeconomic indicators
	2012		2013(e)		2014(p)	2015(p)
Real GDP growth		4,5		5,5	6	6,5
Real GDP per capita growth		3		4	4,5	5
CPI inflation		3,7		2,5	2,4	2,1
Budget balance % GDP		-2,8		-3,1	-3,1	-1,9
Current account balance % GDP		-13,9		-12	-13,4	-14,2
Source: Data from domestic authorities; estimates (e) and projections (p).

Djibouti’s economic outlook is also favorable; most assessments expect growth to continue at unprecedented rates. The African Economic Outlook predicts real GDP growth will hit 6.7% in 2013, with the International Monetary Fund (IMF) estimating annual growth of above 5% through to 2017.

	2010	2011	2012	2013
Agriculture, fishing, livestock	3,17	3,6	3,8	3,2
Exploitation	0,15	0,2	0,17	0,2
Manufacturing	2,57	2,5	2,7	2,5
Electricity and water	5,74	5,3	5,1	5,2
Construction and public works	8,35	9,2	12,5	12,6
Trade and tourism	17,93	18,5	17,5	18,7
Banking and insurance	12,2	13,5	13,7	14,3
Transport and communication	25,71	26,6	26,4	27,8
Other services	1,7	1,6	1,5	1,5
Public administration	10,59	12,7	12,8	13,2
Net indirect tax	11,89	6,3	7,43	11,3
Total	100	100	100	100

 

This trend should continue over the next few years, boosted by a vast ongoing investment programme, especially for infrastructure. The programme is a big turning point for Djibouti, aiming to make the country a regional hub for trade, handling and financial services.

Major investment is planned to strengthen the country’s comparative advantage in goods trading. The government has been trying in recent years to reduce the structural obstacles to adequate electricity and water supply that handicap growth of the private sector, and rose funding in 2013 for several projects which aim to improve supplies.

The USD 8 billion programme includes building new ports, railways and roads, an aqueduct, a desalination plant and housing, and is funded mainly by Chinese investors and the international aid community.

The economy’s major focus on maritime goods transport puts Djibouti low down in the global value chain (GVC). Investment in new port facilities will strengthen this sector by taking advantage of specialized activity such as exporting salt, potash and livestock and trade in oil and liquefied gas. Lower factors of production costs will enable short-term expansion to other GVC sectors.

An agreement in 2000 for Dubai Port World to run the port of Djibouti has enabled the country to use its geo-strategic position at the crossroads of key commercial maritime routes.

Since 2008, a state-of-the-art container port at Doraleh for transit and transshipment of goods has led to an increase in port business that previously passed only through the port of Djibouti. About 80% of goods handled are to or from Ethiopia. Transshipment can include destinations worldwide but volumes vary from year to year.

New port infrastructure investment begun in 2012 will boost port activity in the short term through greater specialization, with two new ports being built for salt and potash exports. The government plans to build others to handle livestock exports and storage of oil and liquefied gas. Such specialization will help to boost activity. The country also plans to expand participation in the GVC through the assembly industry, which could be developed alongside transshipment.

Djibouti’s manufacturing is small-scale, apart from bottling beverages for the local market. The country could develop food processing industries based on its fisheries and livestock resources. Lack of water and electricity will be eased in the medium term by projects that began in 2013 to build an aqueduct and a second electricity line from Ethiopia and a desalination plant.

The infrastructure investment programme also aims to boost the country’s role as a major regional shipping center. Djibouti competes with nearby ports such as Mombasa (Kenya), Berbera (Somalia) and Aden (Yemen). Recent policy decisions have prioritized removing structural constraints on water and electricity supply, followed by a new goal in 2012 identifying potential growth sectors to diversify the economy. Investment policy was reviewed with the UN Conference on Trade and Development in 2013 to improve the country’s attractiveness to investors.

Economic and political governance

Implementation of the government’s infrastructure investment programme will substantially boost the sector in the short term. Water and electricity production and supply projects will reduce the country’s structural constraints and the cost of factors of production.

Construction of two specialized ports was begun in 2013, for exporting potash and salt. Progress was made in improving the business climate and in the World Bank report Doing Business Djibouti rose from 188^th place to 127^th for ease of starting a business, taking the country from an overall rating of 172^nd place to 160^th

The financial sector expanded rapidly between 2006 and 2010, from 2 banks to 11. The sector remains very concentrated, with two of them having 85% of all deposits, but was stable and healthy in 2013.

The arrival of new banks saw the introduction of a limited range of new financial products and services, as well as new funding of domestic activity, which focused on large-scale trade or property-development projects.

Microfinance has grown in recent years and mergers have produced a mutual savings network providing basic financial services for people excluded from the mainstream banking system.

The government actively promoted renewable energy in 2013, and funding for a geothermal resources project was obtained from several donors, along with some three-quarters of the money needed to build a wind-powered desalination plant

An energy efficiency office began operating in 2013 and is working on a law to certify energy-efficient products. An energy survey of public buildings is planned shortly. Since 2011, the country has imported hydro-electricity from Ethiopia that supplies about 80% of its needs.

Djibouti has a number of untouched mineral resources, barely-developed fishery resources and many natural sites with undervalued tourist potential.

Because of its strategic geo-physical position on the Gulf of Aden, Djibouti hosts US, French and Japanese military bases, foreign troops and the European anti-maritime-piracy force, Atalante.

Djibouti's National Investment Promotion Agency (NIPA), created in 2001, promotes private-sector investment, facilitates investment operations, and works to modernize the country's regulatory framework.

NIPA assists foreign and domestic investors by disseminating information and streamlining administrative procedures. Its ultimate goal is to serve as a one-stop shop for investors.

Djibouti has no foreign exchange restrictions. There are no limitations on converting or transferring funds, or on the inflow and outflow of cash. The Djibouti franc, which has been pegged to the U.S. dollar since 1949, is stable. The fixed exchange rate is 177.71 Djibouti francs to the dollar.

Performance requirements are not a pre-condition for establishing, maintaining, or expanding foreign direct investments. Incentives do, however, increase with the size of the investment and the number of jobs created.

Investments greater than US$ 280,000 that create a number of permanent jobs may be exempted from license and registration fees, property taxes, taxes on industrial and commercial profits, and taxes on the profits of corporate entities. Imported raw materials used in manufacturing are exempted from the internal consumption tax. These exemptions apply for up to a maximum of ten years after production commences.

Djibouti offers significant incentives to private-sector individual and corporate investors when establishing a company within its Free Zone.

The Djiboutian investment code guarantees investors the right to freely import all goods, equipment, products, or material necessary for their investments; display products and services; determine and run marketing policy and production; choose customers and suppliers; and set prices.

Djiboutian laws guarantee rights for foreign and domestic private entities to establish and own business enterprises. Legally established private-sector companies have the same access to markets, land ownership, credit, and other business facilities as public enterprises. Foreign investors are not required by law to have a local partner except in the insurance industry.

Why to invest in Djibouti?

• Political Stability:
  • Djibouti is a safe haven for living and business
• Geographical Position:
  • Strategic location at the gateway of East Africa
  • 2nd sea route in the world
  • Unrivalled nautical accessibility at the intersection of main maritime routes
  • Natural port of Ethiopia, handling 98% of  Ethiopian cargoes
  • Open gate to a market of more than 400 million inhabitants, the COMESA.
• Attractive Business Climate:
  • Foreigners and nationals benefit the same advantages
  • Djibouti Franc has fixed parity with US Dollars, 1$ = 177.7 DJF and is freely convertible
  • A financial system is free of any kind of exchange control that provides opportunity to a full freedom of money transfer
  • A developed banking system with 11 international banks
  • Expertise and best practice with efficient and fast customs clearance processes
• Safe and Cost effective solution
  • Secured and well maintained corridor
  • Reduced transit time and cost
  • Its telecommunication system ranks among the best in Africa
• Numerous sectors to invest
  • Renewable Energy (sun, wind, geothermal)
  • Salt (Lake Assal)
  • Refineries
  • Real Estates
  • Transportation(Road, air, railway, sea)
  • Agriculture
  • Fisheries
  • Mining
  • Banking